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Document of The World Bank FOR OFFICIAL USE ONLY Report No: 84065-UA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$300 MILLION AND A PROPOSED CLEAN TECHNOLOGY FUND LOAN IN THE AMOUNT OF US$50.00 MILLION TO UKRAINE FOR A SECOND URBAN INFRASTRUCTURE PROJECT Sustainable Development Department Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective January 16, 2014) Currency Unit = UAH 8.34 UAH = US$1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ADSCR Annual Debt Service Coverage Ratio KfW Kreditanstalt für Wiederaufbau ACS Automatic Calling System Minregion Ministry of Regional Development, Construction, Housing and Communal Services BOD Biological Oxygen Demand MoE Ministry of Economic Development and Trade CO2eq CO2 equivalent MoF Ministry of Finance CPMU Central Project Management Unit MWH Megawatt Hours CPS Country Partnership Strategy NPV Net Present Value CSO Civil Society Organization NRW Non-Revenue Water CTF Clean Technology Fund O&M Operations and Maintenance DB Design-Build OCCR Operating Cost Coverage Ratio EBITDA ORAF Operational Risk Assessment Framework EBRD European Bank for Reconstruction and PAP Project Affected Persons Development EIRR Economic Internal Rate of Return P-RAMS Procurement Risk Assessment Module EMP Environmental Management Plan PDO Project Development Objectives ESAF Environmental and Social Assessment POM Project Operational Manual Framework ESMF Environmental and Social Management RAP Resettlement Action Plan Framework ESMP Environmental Management Plans RPF Resettlement Policy Framework EUR Euro RPMU Regional Project Management Unit FIRR Financial Internal rate of Return SIDA Swedish International Development Agency FM Financial Management SWT Solid Waste Treatment GHG Greenhouse Gas TOR Terms of Reference GoU Government of Ukraine UAH Ukraine Hryvnia IBRD International Bank for Reconstruction UIP Urban Infrastructure Project and Development IFC International Finance Corporation UPI Utilities Performance Improvement IFI International Financial Institution US United States IFR Interim Financial Report VSL Variable Spread Loan ISA International Standards on Auditing WSS Water Supply and Sanitation Regional Vice President: Laura Tuck Country Director: Qimiao Fan Sector Director: Laszlo Lovei Sector Manager: Sumila Gulyani Task Team Leader: Sana Kh.H. Agha Al Nimer UKRAINE Second Urban Infrastructure Project (UIP2) TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................6 A. Country Context ............................................................................................................ 6 B. Sectoral and Institutional Context ................................................................................. 7 C. Higher Level Objectives to which the Project Contributes .......................................... 9 II. PROJECT DEVELOPMENT OBJECTIVE ................................................................10 A. Project Development Objective .................................................................................. 10 B. Project Beneficiaries ................................................................................................... 10 C. PDO Level Results Indicators ..................................................................................... 10 III. PROJECT DESCRIPTION ............................................................................................11 A. Project Components .................................................................................................... 11 B. Project Financing ........................................................................................................ 14 C. Project Cost and Financing ......................................................................................... 14 D. Lessons Learned.......................................................................................................... 15 IV. IMPLEMENTATION .....................................................................................................16 A. Institutional and Implementation Arrangements ........................................................ 16 B. Results Monitoring and Evaluation ............................................................................ 16 C. Sustainability............................................................................................................... 17 V. KEY RISKS AND MITIGATION MEASURES ..........................................................17 A. Risk Ratings Summary Table ..................................................................................... 17 B. Overall Risk Rating Explanation ................................................................................ 18 VI. APPRAISAL SUMMARY ..............................................................................................18 A. Economic and Financial Analysis ............................................................................... 18 B. Technical ..................................................................................................................... 20 C. Financial Management ................................................................................................ 21 D. Procurement ................................................................................................................ 22 E. Social (including Safeguards) ..................................................................................... 23 D. Environment (including Safeguards) .......................................................................... 24 F. Other Safeguards Policies Triggered .......................................................................... 25 Annex 1: Results Framework and Monitoring ................................................................ 26 Annex 2: Detailed Project Description .............................................................................. 30 Annex 3: Implementation Arrangements ......................................................................... 43 Annex 4: Financial and Economic Analysis ..................................................................... 57 Annex 5: Operational Risk Assessment Framework (ORAF) ........................................ 68 Annex 6: Implementation Support Plan ........................................................................... 73 Annex 7: Clean Technology Fund ..................................................................................... 78 Annex 8: Team Composition.............................................................................................. 90 INSERT PAD DATA SHEET HERE THE PAD DATASHEET SHOULD BE INSERTED IN THIS SECTION MANUALLY WHEN THE PAD IS READY TO BE FINALIZED DO NOT INCLUDE THIS INSTRUCTION PAGE IN THE PAD SENT TO THE PRINT SHOP. NOTE: The PAD Datasheet can be found in the “Appraisal Datasheet” tab of the PAD section of the Operations Portal. Prior to sending the final PAD to the Print Shop, it is best practice to confirm the information in the PAD Datasheet before printing it out and inserting it here. UKRAINE Second Urban Infrastructure Project (UIP2) I. STRATEGIC CONTEXT A. Country Context 1. Ukraine is a country of 46 million people, with 68 percent of the population living in urban areas. The country has five cities with a population of over 1 million, another five with a population between 500,000 and 1 million, and some 35 cities that have populations between 100 and 500 thousand. The bulk of the urban population lives in towns of less than 100,000 people. Kiev is the largest city with a population of 2.8 million, followed by Kharkiv with 1.5 million people. 2. The country is emerging from the 2008 economic and financial crisis with serious structural weaknesses. Fiscal imbalances remain significant with large social transfers, inefficient public services, and significant quasi-fiscal subsidies threatening sustainability. The financial sector is fragile and the business climate is persistently ranked among the lowest in the region. Despite an export-led recovery over the past two years, output is below pre-crisis levels, and the economy remains vulnerable to volatile commodity prices and dependent on foreign financing. The public sector is large, but the quality of many public services has been deteriorating. Surveys conducted on the eve of Ukraine’s 20th anniversary of independence and recent social protests reveal widespread discontent with economic conditions and public governance. 3. In the face of well-identified social and economic development challenges, successive Ukrainian governments have struggled with implementing reforms. Behind many implementation difficulties lie fundamental challenges of economic and political governance. Corruption and state capture have been pervasive and are broadly recognized as a major development constraint. 4. Over the past decade, Ukraine’s authorities have shied away from undertaking structural reforms, and public trust in the state has been undermined. This, in turn, has created public resistance to necessary but painful reforms of social transfers and public services. Consecutive governments have thus opted for short-term fiscal